401k contributions as 1st year analyst

dblock21's picture
Rank: Senior Baboon | 227

Trying to get my budget together before starting FT this summer. I wanted to get opinions on monthly 401k contributions vs. no monthly contribution and using the first bonus to max out my 401k and lower my tax base. Also, my employer does not match any contributions.

Comments (36)

May 13, 2013

My #1 advice on this matter:
If you make less than ~120k (look up exact number yourself) max out your Roth IRA ASAP (5.5k/yr now).
Roth IRA is the nuts. It fits really well with anyone who's working in the industry that isn't making big bucks (usually ur first few years if not in NYC).

May 13, 2013
floppity:

My #1 advice on this matter:
If you make less than ~120k (look up exact number yourself) max out your Roth IRA ASAP (5.5k/yr now).
Roth IRA is the nuts. It fits really well with anyone who's working in the industry that isn't making big bucks (usually ur first few years if not in NYC).

Probably an easy answer or unintentional word change - why do you mention the IRA as opposed to the 401k?

May 13, 2013
Not not a boutique:
floppity:

My #1 advice on this matter:
If you make less than ~120k (look up exact number yourself) max out your Roth IRA ASAP (5.5k/yr now).
Roth IRA is the nuts. It fits really well with anyone who's working in the industry that isn't making big bucks (usually ur first few years if not in NYC).

Probably an easy answer or unintentional word change - why do you mention the IRA as opposed to the 401k?

my guess would be that he means in addition to the 401k

Nov 4, 2016

IRA is your personal account - not tied to your employer.

IRAs have different caps for contributions that will be based on your income in addition to straight dollar caps.

Maxing out a Roth IRA (there are Roth 401s but I've only seen these at one of the five places I've worked now) will help NOW because it has the lowest cap for contributions based on income. And everything you gain on your contributions you can withdraw tax free in retirement ceteris paribus.

May 13, 2013

I would max it out based on your salary and then adjust your standard of living to match the lowered take home. You can then use your bonus to pay off any debt / build emergency savings / invest / have a little fun.

The fact that your employer does/does not match shouldn't figure into the equation. Getting a head start on retirement savings is about your future, not capturing some incentive comp.

May 13, 2013

I'm with floppity on the Roth IRA. Also, it's so important to put in as much as you can on 401k now because the benefits later on down the road are incredible. Besides, at this young age, you can deal with a little bit more income variability.

May 13, 2013

A lot of firms won't let you contribute 401k from your bonus.

For your first year, your net marginal tax rate, if living in NYC, is going to be about 25%. You'll be in the 15% tax bracket for 5-6 months of analyst base salary work in Manhattan, and this may be one of the best times to contribute to a Roth 401k, assuming you aren't saving for business school.

You should be able to make it in NYC on $70K/year pretax; $60K/year if you live in Hoboken or an outer borough. So if you're collecting an $80K/year analyst salary, you can easily afford to save $10K of that.

If you do plan on b-school, and you plan on doing it in a lower tax jurisdiction like IL (Kellogg, Booth) or MA (HBS, Sloan) or PA (Wharton) but not a high tax jurisdiction (CA or NY), I would make regular 401k contributions now and think about rolling them over to a Roth when you are in B-school, or withdrawing from a converted pre-tax IRA to pay for b-school (penalty free.)

I still hate the idea of paying 7% to New York State and 4% to NYC for retirement savings when so many jurisdictions allow you to do a state-tax-free or lower state tax conversion to a Roth. Roths are a great deal if you're in the 15% tax bracket and paying CT or PA taxes; they're a mediocre deal if paying a marginal tax rate of 26%, even if tax rates are going up.

My experience with this:
-Worked in NYC for five years, including starting as an analyst. (Back then, when dinosaurs roamed Wall Street, incoming analysts made $60K)
-Currently paying for school through nearly tax-free withdrawals from a pre-tax IRA.

May 13, 2013
IlliniProgrammer:

A lot of firms won't let you contribute 401k from your bonus.

For your first year, your net marginal tax rate, if living in NYC, is going to be about 25%. You'll be in the 15% tax bracket for 5-6 months of analyst base salary work in Manhattan, and this may be one of the best times to contribute to a Roth 401k, assuming you aren't saving for business school.

You should be able to make it in NYC on $70K/year pretax; $60K/year if you live in Hoboken or an outer borough. So if you're collecting an $80K/year analyst salary, you can easily afford to save $10K of that.

If you do plan on b-school, and you plan on doing it in a lower tax jurisdiction like IL (Kellogg, Booth) or MA (HBS, Sloan) or PA (Wharton) but not a high tax jurisdiction (CA or NY), I would make regular 401k contributions now and think about rolling them over to a Roth when you are in B-school, or withdrawing from a converted pre-tax IRA to pay for b-school (penalty free.)

I still hate the idea of paying 7% to New York State and 4% to NYC for retirement savings when so many jurisdictions allow you to do a state-tax-free or lower state tax conversion to a Roth. Roths are a great deal if you're in the 15% tax bracket and paying CT or PA taxes; they're a mediocre deal if paying a marginal tax rate of 26%, even if tax rates are going up.

My experience with this:
-Worked in NYC for five years, including starting as an analyst. (Back then, when dinosaurs roamed Wall Street, incoming analysts made $60K)
-Currently paying for school through nearly tax-free withdrawals from a pre-tax IRA.

sorry i might be missing something, but how are those withdrawals nearly tax-free? did you mean penalty-free? even if you are currently in a lower tax jurisdiction, you are still paying taxes on your withdrawals as ordinary income. unless you are withdrawing such small amounts each calendar year that you are placed in a very low tax bracket where you pay almost nothing in taxes. if you are withdrawing 30k each year for business school, you will get taxed the same as (or very similar to) someone working and making a salary of 30k/year (obv this rate will be much lower than the rate you paid on your income before you went back to school, but it is far from 'nearly tax-free')

May 13, 2013
i hate audit:

sorry i might be missing something, but how are those withdrawals nearly tax-free? did you mean penalty-free? even if you are currently in a lower tax jurisdiction, you are still paying taxes on your withdrawals as ordinary income. unless you are withdrawing such small amounts each calendar year that you are placed in a very low tax bracket where you pay almost nothing in taxes. if you are withdrawing 30k each year for business school, you will get taxed the same as (or very similar to) someone working and making a salary of 30k/year (obv this rate will be much lower than the rate you paid on your income before you went back to school, but it is far from 'nearly tax-free')

If you go back to school, and that education improves existing job skills but does not qualify you for a new industry, you get to take a business deduction for the tuition expense. This is in addition to the penalty free 401k withdrawal.

Typically an MBA or an MFE, if you are already established as a banker or as a trader or quant, will not qualify you for a new industry but will improve existing job skills.

Check out IRS publication 970, Chapter 12, "Business Deduction for Work Related Education"

As for taxes, the state tax is extremely important. IL charges no taxes on retirement withdrawals, including qualifying withdrawals from IRAs, regardless of whether that money is used for retirement. So if you go to Northwestern or Chicago, withdrawals to pay tuition are tax-free in IL and may even be largely tax free (as a business expense deduction, subject to a 2% AGI floor, and limitations due to the Alternative Minimum Tax) at the federal level, too. Even if not, you get a $2000 Lifetime Learning Credit that's largely worthless unless you have about $28K in income during the calendar year you attend school for two semesters.

May 13, 2013

No match blows. Try and put away enough to hit the max. Minimize your tax burden at all costs.

May 13, 2013

Max out the Roth as a first step. If your income happens to over the contribution limits utilize a back door Roth conversion.

May 13, 2013

Thanks guys, I really appreciate the insight. It seems the consensus leans more towards the IRA than worrying about maxing out my 401k first.

Also, I'm heading to a boutique in SF...65K base with student loans coming in around $500/month. Outside of that I am trying to keep rent around $1500/month. Since I am only working 6 months in 2013 I have claimed enough allowances to receive around $4k/month after tax. I will definitely look more into Roth IRA, thanks again and please keep the advice coming.

May 13, 2013

What's the interest rate on the student loans? If it's more than 4%, and you don't get a match, pay off the loans first.

After death and taxes, the surest thing in life is student loans. They can't be discharged in bankruptcy. They follow you everywhere. The interest accrues even if you're not working. And 4% essentially risk-free isn't such a bad interest rate.

May 14, 2013

@illiniProgrammer ---- I believe the rate is 6.8% on the student loans with a current balance ~ 41.5K.

May 14, 2013
dblock21:

@illiniProgrammer ---- I believe the rate is 6.8% on the student loans with a current balance ~ 41.5K.

Unless you plan on dying sometime soon, that's an opportunity to open a risk-free 41.5K CD paying 6.8%. And after this year, if you are making what a BB analyst makes, it's a tax-free 6.8% since you'll probably be making too much for the student loan interest deduction.

This is a no-brainer; pay off the student loans first. The only exceptions are:

-if you feel like you need more emergency savings
-if you have high-interest (we're talking more than 15%) credit card debt
-if you plan on going back to grad school full-time extremely soon. (IMHO a bad move.)

Seriously, getting rid of $200+/month in interest is going to be a REALLY good feeling.

May 14, 2013

not doing CPA advisory work altho i am a CPA. currently working in internal corporate strategy at a F100. i'm guessing someone could possibly end up as an associate at an IB without an MBA from my position. i think i will reach out to some tax CPA's to get their take on this. thank you for the advice and best of luck at your MFE, you're at princeton right?

May 14, 2013
i hate audit:

not doing CPA advisory work altho i am a CPA. currently working in internal corporate strategy at a F100. i'm guessing someone could possibly end up as an associate at an IB without an MBA from my position. i think i will reach out to some tax CPA's to get their take on this. thank you for the advice and best of luck at your MFE, you're at princeton right?

Yeah, I'm doing an MFE here.

I've figured out a perfectly legitimate and above-board way for me to avoid the state tax, but I'd rather not bring too much public attention to it. I'm happy to discuss it via PM. I do follow NJ tax law and I will clear an audit on this, but I'd prefer not to invite one in a state that desperately needs tax revenues.

Either way, whether there is a business tax deduction or not, contributing to a pre-tax IRA gives you a lot more options for maximizing the tax benefits of grad school. At the very least, you get to income shift from high tax years to low tax years, so long as the money is used for tuition or school-related expenses and qualifies to avoid penalties.

May 14, 2013

Thanks again guys, I appreciate the advice. I find the fact that I do not receive a match from my employer makes it hard to determine how much I should throw into the 401k (since the usual advice is at least get to the max match). I like the Roth 401k. Although I do not plan on attending B-school soon (or hopefully ever, just finished up my MSF), I am assuming this is the lowest tax bracket I will ever be in so the Roth definitely makes sense.

Jul 5, 2013

Why is it recommended to max your contribution to your 401k in your first year? Since your first year as an analyst is only ~5-6 Months and your being taxed at your base rate, won't you get everything you pay back in your refund? I don't know, but it would make more sense to me if you waited to max your 401k until your second year.
I am about to begin my first year next month and would like to hear someone else's take on this?

Jul 7, 2013

Yea, honestly, if your employer is not matching any contributions then I probably wouldn't do a 401k. While there are tax benefits to it, one of the best reasons to do a 401k was so you wouldn't leave free money on the table. In your case, I would probably opt out of it to be honest.

Jul 7, 2013
TeddyTheBear:

Yea, honestly, if your employer is not matching any contributions then I probably wouldn't do a 401k. While there are tax benefits to it, one of the best reasons to do a 401k was so you wouldn't leave free money on the table. In your case, I would probably opt out of it to be honest.

If the employer isn't matching contributions and you're not planning on graduate school I'd put in 5% or less into the 401k, make sure the ROTH IRA is maxed, and have the rest in some other investment vehicle.

Jul 7, 2013

Practically speaking where and how do you open a 401k or Roth IRA?

Jul 7, 2013
mattyboy:

Practically speaking where and how do you open a 401k or Roth IRA?

401k can only be done through your employer. An IRA can be opened at any brokerage online.

Jul 7, 2013

Do you have any you would recommend? I would imagine fees could be a big issue.

Nov 3, 2016
mattyboy:

Do you have any you would recommend? I would imagine fees could be a big issue.

Fidelity has practically no fees if you deposit $2k.

Bank of America gives you a free $600 if you deposit $200k.

Jul 7, 2013

Even if your employer doesn't match, it could be worth it to contribute pre-tax to reduce your tax basis. Also, I assume you graduated in May? If so, be sure to check out the american opportunity tax credit. It's a $2,500 credit applicable to a broad range of education expenses and bonuses don't usually hit 6+ months in most 1st years will qualify w/ no phase-out. Definitely worth checking out, saved me some serious $$$ in taxes.

http://www.irs.gov/uac/American-Opportunity-Tax-Cr...

Jul 7, 2013

Approx what % of your savings should you be aiming to save in cash your first year / have stashed away in 401k or Roth IRA?

Jul 7, 2013
damonkey890:

Approx what % of your savings should you be aiming to save in cash your first year / have stashed away in 401k or Roth IRA?

In terms of any pre-tax retirement contributions its a tradeoff of maximum long-term value vs how comfortable you are with the fact that any money you contribute pre-tax is locked up until you're 59.5 years old. There is no right answer.

If you want to 100% maximize your wealth/income at age 60+ and don't care about sacrificing current consumption/liquidity between now and when you're 60 contribute the maximum (17000 401k 5500 IRA). Otherwise contribute less.

Jul 8, 2013
ND3567:

Why is it recommended to max your contribution to your 401k in your first year? Since your first year as an analyst is only ~5-6 Months and your being taxed at your base rate, won't you get everything you pay back in your refund? I don't know, but it would make more sense to me if you waited to max your 401k until your second year.

I am about to begin my first year next month and would like to hear someone else's take on this?

I don't think I've said that.

Your first year, you should probably be contributing to a Roth rather than a traditional 401k. You're in the 15% tax bracket, and hopefully this will be one of your last years in the 15% bracket.

In reality, for most people, your first year should be devoted to paying down debt and building up an emergency savings. You should also collect the company match if there's a reasonable chance you'll stay long enough for it to vest.

Jul 8, 2013
Jul 8, 2013

[quote=Quazie]

http://wallstreetplayboys.com/hacking-your-401k/

Some of this is interesting, but some of this needs work. Would you rather save 25% this year or 28% next year when it comes to maxing out your pretax 401k?

If anything, you should be deferring 401k income into next year. If you can save $5k your stub year, pretax, would you rather have that cost you $3750 after tax or $3600 after tax? I say save the $150 and spend it on PBR*.

This advice is for a low rates environment. If rates go up in 2014, as I suspect, this advice may change.

Jul 9, 2013

Currently have 36K at a 6% blended rate in Student Loans. Also have a Roth 401K paying 25% on the first 6%. Is the conventional advice to contribute the 6% and attack the student loans? Or max the Roth 401K? Also, should I have a traditional 401K as well? I'm in my second year. When do you make the transition from Roth to standard 401K? If its worth mentioning, I plan on going to B School in the next 3-4 years. From my understanding, you can withdraw principal payments from the Roth 401K penalty and tax free. Can't say the same for the traditional. Any thoughts appreciated.

Jul 9, 2013
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Nov 4, 2016